FHA mortgages can hurt low-risk borrowers, critics say

New York /
Dec.December 06, 2013 11:15 AM
 

Mortgages insured by the Federal Housing Administration are often the only port of call for borrowers who can’t afford a hefty down payment, but critics say that the FHA mortgages come with high premiums that exploit these borrowers.

If the economy were to slide back into a recession, said Edward Pinto, a fellow of the American Enterprise Institute, the majority of FHA loans would be at high risk of default. And since the FHA prices all the loans equally, borrowers have no barometer to gauge the relative riskiness of their loans.

In fact, Pinto told the New York Times, the low-risk borrowers would probably be better off getting a loan from the private sector, as the FHA is effectively overcharging them to subsidize the higher-risk borrowers. “They may assume that the government is protecting their interests,” Pinto said.

FHA-backed loans offer first-time buyers a down payment of as little as 3.5 percent, compared to a minimum of 5 percent for loans backed by Fannie Mae, according to the Times. But the premiums on FHA loans are considerably higher, the newspaper said.

Borrowers would be well-served if the FHA shifted to risk-based pricing, suggested Michael Lea of the Corky McMillin Center for Real Estate at San Diego State University. And the FHA should inform borrowers of the difference in insurance costs for FHA and Fannie Mae loans, Lea told the Times. [NYT]  – Hiten Samtani


Related Articles

arrow_forward_ios
(Photo Illustration by Steven Dilakian for The Real Deal with Getty)
Mortgage applications surge 25% in the new year as interest rates drop
Mortgage applications surge 25% in the new year as interest rates drop
A photo illustration of Blend Labs CEO Nima Ghamsari (Getty, Blend Labs)
Digital mortgage firm Blend cuts 30% of staff
Digital mortgage firm Blend cuts 30% of staff
Wells Fargo puts the brakes on mortgage business
Wells Fargo puts the brakes on mortgage business
Wells Fargo puts the brakes on mortgage business
From left: United Wholesale Mortgage's Mat Ishbia and Phoenix Suns' Chris Paul, Devin Booker, and Deandre Ayton with the Footprint Center
Mortgage lender exec poised to buy Phoenix Suns for $4B
Mortgage lender exec poised to buy Phoenix Suns for $4B
41 Pinelawn Road in Melville LI and Reverse Mortgage Funding CEO Craig Corn (Loopnet, RMF)
Reverse mortgage giant lays off 119 on Long Island
Reverse mortgage giant lays off 119 on Long Island
(Photo Illustration by The Real Deal with Getty)
Purchase applications climb as mortgage rates stabilize
Purchase applications climb as mortgage rates stabilize
Leslie J. Garfield's Stanley Montfort (Leslie J. Garfield & Co., Getty)
Co-ownership can help NYC homebuyers, but adds risk
Co-ownership can help NYC homebuyers, but adds risk
(Photo illustration by The Real Deal with Getty)
Mortgage applications decline even as rates fall again
Mortgage applications decline even as rates fall again
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...